More on the General Effect of Welfare on Wages

Here’s a follow-up letter to a correspondent who continues to insist that welfare payments reduce the wages of low-income workers:

Mr. Chris Indovino

Mr. Indovino:

You’re unconvinced by the argument that government welfare payments generally reduce the supply of labor and, thus, cause the wages paid to low-income workers to rise. You write that “if taxpayers are footing a portion of the bill for poor workers to feed and clothe their families employers can get by by paying less to workers on welfare.”

Before I try again to convince you that you’re mistaken, let me acknowledge that there is one form of government welfare in the U.S. that does reduce poor-workers’ wages. That’s the Earned Income Tax Credit (EITC). Because one must work to be eligible to receive the EITC, this program increases the supply of labor and, thus, causes wages to fall. But the typical government welfare program, for which non-workers as well as workers are eligible, reduces the supply of labor and, thus, causes wages to rise.

Here’s why. Suppose you win a billion dollars in a lottery. What happens to your willingness to continue working at your current job? According to the logic expressed in your e-mail, you should now be willing to work for nothing, given that your lottery winnings are now sufficient to pay all of your expenses. But of course you will instead almost surely quit your current job. And if your employer wants to persuade you not to quit, he’ll have to offer you a much higher wage in order to make it worth your while to continue working. (Imagine how you’d react if your employer said to you “I want you to keep working and accept a pay cut to $0 per hour. I don’t have to pay you anything now because your lottery winnings cover all of your expenses.”) Winning the lottery, by reducing the supply of your labor, raises the wage that you must be paid in order to work.

Please don’t mistake me as equating government welfare payments for lottery winnings. They’re obviously different. But they both do reduce the supply of labor and, therefore, they both put upward pressure on the wages that employers must pay to recipient workers. The lottery example is a way of showing that workers do not reduce their wage demands simply because some of their expenses are covered out of non-wage income.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030